However, the coal company it was supposed to fund never obtained key licences for its activities, state media reported, and now the firm that structured it, China Credit Trust Co (中誠信託), says it may not be able to repay 3 billion yuan (US$492 million) due on Friday.

The situation is a test case for cleaning up the risky “shadow banking” system in the world’s second-largest economy.

Analysts said the government could use a default to send a message about the danger of speculative investments, while showing Beijing’s commitment to reining in the vast pools of capital threatening financial stability.

At the same time authorities must walk a fine balance between cracking down and preventing protests by angry investors — as well as setting off a chain reaction that sharply tightens credit in an economy where growth is already slowing.

Chinese “shadow banking” is a massive network of lending outside formal channels and beyond the reach of regulators, including activities by online finance platforms, credit guarantee companies and microcredit firms.

It was as large as US$4.8 trillion in 2012, more than half the country’s GDP, according to an estimate by ratings agency Moody’s.

China’s powerful State Council, or Cabinet, reportedly issued internal guidelines last month to crack down on the sector. However, ratings agency Fitch said in a report: “The reforms may seem like a good beginning, but they have a long way to run.”

China Credit Trust sold the investment product from 2010 through branches of the ICBC to about 700 of the bank’s high-net-worth clients.

The trust channeled the funds to Zhenfu Energy Group (振富能源集團) in the country’s mining heartland of Shanxi Province. However, the company’s owner was detained by authorities in 2012, state media reported, raising questions over the viability of the firm.

“ICBC and China Credit Trust dug a hole, covered it with a straw mat and told us to jump in,” said Gao Yiyang, an investor who spent almost US$500,000 of his family’s money on the product.

“It now appears our money was not used for any of the company’s actual operations. It was purely fraud to get our money to fill a huge deficit hole,” he said.

In a letter sent to investors earlier this month, a copy of which was seen by reporters, China Credit Trust said: “Currently, there is still uncertainty over whether the trust can be converted to cash before Jan. 31.”

Products sold by China’s roughly 65 trusts offer high returns and big risk, drawing comparisons to the West’s “junk bonds” of the 1980s.

“Some central government-level policymakers could be open to seeing a default, as it would encourage more careful risk assessment,” Goldman Sachs economist Andrew Tilton said in a recent research report.

“If the realization of significant losses by investors causes others to pull back from funding various forms of shadow banking credit, overall credit conditions could theoretically tighten sharply with consequent damage to growth,” he added.

ICBC says it has no direct liability for the product.

“We did not assume that kind of fixed responsibility,” ICBC chairman Jiang Jianqing (姜建清) told US financial television channel CNBC.

“For investors, this incident provides them with a case whereby they can learn lessons. In future, when they invest in wealth [management] or other products, they must see clearly the risk,” he said.

However, Chinese investors have few choices on where to park their money, with low deposit rates, government controls over the property market, capital controls limiting overseas investment and one of the world’s worst-performing stock markets last year.

The combination has caused a boom in informal lending offering better returns.

Investors might still get some money back. An insurance company and an asset management firm — set up to handle banks’ bad loans — have been cited by state media as possible rescuers.

Richard Chang, a buyer who organized a gathering of investors in Shanghai, said they would insist ICBC makes good any losses.